FlashBack:Economic Warfare: China Threatens U.S. Debt as WMD

In a clear threat of economic warfare, China indicated that it may sell-off its holdings of U.S. Treasury notes in retaliation for our recent arms sale to Taiwan. China’s military stepped up pressure on the United States on Monday by publicly calling for a government sell-off of U.S. Treasury notes. According to a report in the Conservative fish-wrap, the Washington Times, a group of senior Chinese military officers said in their state-controlled news interviews that China’s leaders should boost defense spending and expand force deployments in the wake of the U.S. announcement last month of a $6.4 Bn military arms sale to Taiwan.

Senior officers from the Chinese National Defense University and Academy of Military Sciences made what some view as an economic warfare threat, something outlined in China’s past military doctrines. The comments by Maj. Gen. Zhu Chenghu and Maj. Gen. Luo Yuan and Senior Col. Ke Chunqiao appeared in the state-run Xinhua News Agency, published in Beijing on Monday. Gen. Luo warned that China could attack the U.S. “by oblique means and stealthy feints,” and he called for retaliation for the arms sale. “For example,” he said, “we could sanction them using economic means, such as dumping some U.S. government bonds.” Luo added, “Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counterpunches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease.”

Of China’s $1.6 Trn in foreign reserves, they hold about $760 billion worth of U.S. Treasury debt . It is not clear what impact selling off some of the securities would have on the struggling U.S. economy, but one immediate impact would be a further decline of the dollar, and possibly losing our AAA credit rating. Some analysts also say that selling off some bonds could drive up interest rates and disrupt U.S. economic recovery efforts. At the State Department, spokesman P.J. Crowley dismissed the economic threat as potentially self-defeating. “That would be biting the nose to spite the face,” Mr. Crowley said. “The economies of the United States and China are intertwined,“ reflecting widely held attitudes that U.S. Treasury notes are still considered the gold standard in terms of safety of principle in world markets. Selling a substantial position in U.S. debt would leave China’s foreign reserves at risk, and would lessen their capacity to fund capital investments needed for their development as an emerging power.

The Chinese military comments, however, reflect the contents of a military doctrine by Chinese military officers called “Unrestricted Warfare,” which calls on the Chinese military to adopt unconventional methods and strategy in waging war, specifically “financial,” “electronic” and “trade” war along with other forms of warfare.

China and the United States have clashed in recent weeks over a host of issues that have heigthened tensions on top of the Taiwan arms sale, including Beijing’s opposition to the upcoming meeting between President Obama and the exiled Tibetan Buddhist leader, the Dalai Lama. Secretary of State Hillary Rodham Clinton also criticized China recently for tightening controls on the Internet, which she suggested was a violation of basic freedom. The administration also has sought the Chinese government’s explanation for the recent computer attack on the Internet giant Google and several other U.S. high-technology firms, suggesting that Beijing was behind the computer intrusions and data theft.

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The Chinese military comments, however, reflect the contents of a 1999 book by two high ranking Chinese military officers called “Unrestricted Warfare,” which called on the Chinese military to adopt unconventional methods and strategy in waging war, specifically both “financial” and “trade” war along with other forms of warfare. The second officer, Gen. Zhu, said Monday that proposed U.S. arms sales to Taiwan threatens Chinese military bases along the southern coast across the 100-mile Taiwan Strait. “This gives us no choice but to increase defense spending and adjust [military] deployments,” said Gen. Zhu, who is with the National Defense University in Beijing. Gen. Zhu made headlines in 2005 when he told reporters that China would use nuclear weapons to attack U.S. cities if the United States struck China with precision-guided conventional missiles. The statement raised questions at the time among Pentagon officials over whether China had abandoned its stated policy of not being the first to use nuclear weapons in a conflict.

Gen. Luo has asserted in the past that China needs to change its approach to the U.S. by asserting China’s power. John Tkacik, a former State Department China specialist, said China’s Central Military Commission has the power to order financial measures such as selling U.S. securities, although it is a complex process. “The Chinese military now believes that China has tremendous economic and financial leverage, especially over the United States, and they are giving fair warning to the world that they will use it when they can,” he said.

After the remarks, China’s government sought to play down the incident by quietly putting out word to Western journalists that Gen. Zhu had been demoted, a claim accepted by many U.S. China hands but one that was called into question by his comments in the magazine this week. The military leaders’ comments are unusual because tightly controlled state-run media in China normally do not permit such provocative comments directly criticizing the United States to be published.

China’s military has no control over the country’s financial policies, although the military remains a powerful force in the communist system where ultimate power resides in the Central Military Commission, headed by Chinese President Hu Jintao along with two key generals as deputies……HERE IS MORE